Former employees say stock buyback before its acquisition by Glaxo undervalued shares

Published 9:21 pm, Saturday, February 16, 2013

A view of the Stiefel Labs plant, now owned by GlaxoSmithKline seen here on Thursday, Feb. 14, 2013 in East Durham, NY. (Paul Buckowski / Times Union)

A view of the Stiefel Labs plant, now owned by GlaxoSmithKline seen here on Thursday, Feb. 14, 2013 in East Durham, NY. (Paul Buckowski / Times Union)

Photo: Paul Buckowski

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A view of the Stiefel Labs plant, now owned by GlaxoSmithKline seen here on Thursday, Feb. 14, 2013 in East Durham, NY. (Paul Buckowski / Times Union)

A view of the Stiefel Labs plant, now owned by GlaxoSmithKline seen here on Thursday, Feb. 14, 2013 in East Durham, NY. (Paul Buckowski / Times Union)

Photo: Paul Buckowski

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A view of the Stiefel Labs plant, now owned by GlaxoSmithKline seen here on Thursday, Feb. 14, 2013 in East Durham, NY. (Paul Buckowski / Times Union)

A view of the Stiefel Labs plant, now owned by GlaxoSmithKline seen here on Thursday, Feb. 14, 2013 in East Durham, NY. (Paul Buckowski / Times Union)

Photo: Paul Buckowski

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A view of the Stiefel Labs plant, now owned by GlaxoSmithKline seen here on Thursday, Feb. 14, 2013 in East Durham, NY. (Paul Buckowski / Times Union)

A view of the Stiefel Labs plant, now owned by GlaxoSmithKline seen here on Thursday, Feb. 14, 2013 in East Durham, NY. (Paul Buckowski / Times Union)

Photo: Paul Buckowski

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A view of the Stiefel Labs plant, now owned by GlaxoSmithKline seen here on Thursday, Feb. 14, 2013 in East Durham, NY. (Paul Buckowski / Times Union)

A view of the Stiefel Labs plant, now owned by GlaxoSmithKline seen here on Thursday, Feb. 14, 2013 in East Durham, NY. (Paul Buckowski / Times Union)

Photo: Paul Buckowski

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A view of the Stiefel Labs plant, now owned by GlaxoSmithKline seen here on Thursday, Feb. 14, 2013 in East Durham, NY. (Paul Buckowski / Times Union)

A view of the Stiefel Labs plant, now owned by GlaxoSmithKline seen here on Thursday, Feb. 14, 2013 in East Durham, NY. (Paul Buckowski / Times Union)

Photo: Paul Buckowski

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A view of the Stiefel Labs plant, now owned by GlaxoSmithKline seen here on Thursday, Feb. 14, 2013 in East Durham, NY. (Paul Buckowski / Times Union)

A view of the Stiefel Labs plant, now owned by GlaxoSmithKline seen here on Thursday, Feb. 14, 2013 in East Durham, NY. (Paul Buckowski / Times Union)

Photo: Paul Buckowski

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Suits allege Stiefel sham

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DURHAM — After emigrating from Germany in 1947, the Stiefel family turned a former creamery in the Greene County hamlet of Oak Hill into a soap factory.

Over the ensuing decades, the Stiefels, who established deep roots in the Capital Region, grew the business into an international dermatology giant that made them millionaires.

Although the company relocated its headquarters to Coral Gables, Fla., in the late 1970s, the Stiefel name meant a lot to Greene County and the region. The company employed hundreds at its Oak Hill facility, which also included a research and development center.

Nearly 70 years later, the factory now makes Aquafresh and Sensodyne toothpastes for GlaxoSmithKline, the international pharmaceutical conglomerate that bought the Stiefel business in 2009 for $3.6 billion. The family's rise from entrepreneurial immigrants to billionaires is a testament to American capitalism and opportunity.

And the Stiefels rewarded those who helped them along the way, giving stock in the privately-held company to long-term workers for their dedication and loyalty. The stock became a retirement nest egg for many who worked there.

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But now the Stiefel family name is under assault. After the sale to Glaxo, former Stiefel employees began suing the company and family members, alleging that they had been tricked by company executives into selling their stock back to the company during the run-up to the company's sale at a substantial discount to its true market value.

The U.S. Securities and Exchange Commission got involved, alleging Stiefel defrauded workers out of $110 million in potential earnings from the Glaxo sale.

Over the past three years, the allegations have resulted in several lawsuits against Stiefel that have tarnished the family's reputation. One of the cases, tried in federal court in Florida, ended with a $1.5 million verdict against Stiefel and Charles Stiefel, who is now retired from the company and is a philanthropist in Raleigh, N.C., dedicated to medical causes.

And last month, Stiefel was again sued by former employees, this time in U.S. District Court in Albany. The four employees who brought the suit worked at the company's Oak Hill facility for a combined 92 years. They live in small towns like Cornwallville, Round Top, Cairo and Stuyvesant. They are suing not only Charles Stiefel, but also his two sons, Brent and Todd, who were top executives at Stiefel until the company was sold.

The Stiefels' legal team is appealing the Florida case and has steadfastly defended the family's actions leading up to the sale.

London-based Glaxo, which has disclosed the legal troubles with Stiefel in regulatory documents since it acquired the company, has also said that it did not act improperly in its acquisition. It is not a defendant in the lawsuits.

"Stiefel denies that it or Charlie Stiefel acted improperly or did anything to violate federal law," said Stef Mendell, a Glaxo executive who is a spokeswoman for its Stiefel unit. "Stiefel and Charlie Stiefel intend to vigorously defend themselves in court."

Still, documents filed in the various cases do not always paint a sympathetic picture of the Stiefel family.

The allegations in the lawsuits center on a stock buyback program that Stiefel announced in November 2008. The company said it would be terminating the employee stock bonus plan that had provided shares to workers over the years. Employees were told they would have a one-month opportunity to sell their shares back to the company.

Such an opportunity to realize the monetary value of the stock — which didn't trade on any stock exchange — was never typically available unless employees retired, lost their jobs or died.

The Albany lawsuit says that management described the stock buyback program as a "diversification opportunity" that would allow them to liquidate their shares and put the proceeds into a 401(k) retirement plan that would allow them to hold onto the cash or invest it in more easily traded stocks or bonds.

What company management didn't say at the time, the lawsuit alleges, was that the company was aware of interest in Stiefel by several potential buyers who were willing to pay sums that valued the company much higher than they would expect, considering how much the company told them their shares were worth.

Every year, Stiefel would send a letter to employees who held stock that told them what their shares were worth, based on a valuation of the company by a small accounting firm based in Rhinebeck.

In 2008, Stiefel employees were told that each share that they held was worth $16,469, which put the company's market value at $876 million. But at the same time, Stiefel executives knew that that number was much lower than what the company would be worth in a potential sale, the lawsuit alleges.

Two years before the company offered to buy shares from employees, the suit alleges, Stiefel was approached by private equity firms that had offered to buy stakes in the company based on the company being worth between $2 billion and $3 billion.

Many Stiefel employees participated in the buyback program and sold their shares back to the company. This made members of the Stiefel family — who owned a majority of the company's stock — very excited, according to documents filed in the Florida lawsuit.

In February 2009, Brent Stiefel, who was chief of pharmaceutical operations for Stiefel, sent email messages to his brother and his father. Brent Stiefel said he had been looking over the shareholder database and had noticed "very interesting changes" since the buyback program had been announced. He attached a spreadsheet to the email that showed how the family's ownership in the company was rising, something that would mean a larger payout if the company was sold. The company even increased the pot of money it was willing to spend on employee stock from $10 million to $15 million.

"It is nice to see the $ go up for all of us!" Brent Stiefel wrote.

Stiefel ended up buying 350 shares back from employees. The top price it paid was $14,517 a share, the Albany lawsuit alleges.

A month later, rumors started circulating, and a Wall Street Journal article said Stiefel would be sold for as much as $3 billion. On April 20, Stiefel said it was selling the company to Glaxo for $2.9 billion cash and the assumption of $400 million in company debt, along with the potential for hundreds of millions of dollars in additional incentives. Those who were lucky enough to still own Stiefel stock would be paid $68,515 for each of their shares, nearly five times what other employees had received only months before.

According to transcripts of the Florida trial, Charles Stiefel testified that he left Glaxo within days of the merger being finalized and then signed a three-year deal to work as a consultant at $2 million a year.

Stiefel also testified that he was paid $240 million by Glaxo for his stock.